Filing Delinquent FBARs

Posted on: August 21, 2014 | By: Stephen Dunn | Bank Secrecy Act, FBARs, Filing Delinquent FBARs, Foreign Assets Compliance

Congress enacted the FBAR filing obligation, and the draconian penalty for failure to discharge the obligation, to curb the use of foreign accounts to evade U.S. income tax.  It follows that the draconian penalty ought not apply where the taxpayer owes no income tax on foreign accounts.  The Internal Revenue Service’s Delinquent FBAR Submission Procedures, issued on June 18, 2014, confirms that indeed this is the case.

Taxpayers who do not need to use either the OVDP or the Streamlined Filing Procedures to file delinquent of amended income tax returns to report and pay additional income tax, but who:

(1)               have not filed one or more delinquent FBARs,

(2)               are not under civil examination or criminal investigation by the IRS, and

(3)               have not already been contacted by the IRS about the delinquent FBARs

should file the delinquent FBARs according to the FBAR instructions.  The taxpayer selects a reason for filing late on the cover page of the electronic FBAR form.  Often this is “Did not know that I had to file.”

Examples

Example 1. Taxpayer had beneficial ownership foreign accounts from 2005 until 2009.  Information on the accounts is as follows:                     

                         Aggregate Income     Highest Aggregate
Year                      on Accounts         Balance of Accounts
2005                          $21,000                    $320,000
2006                          $23,000                    $343,000
2007                          $26,000                    $369,000
2008                          $31,000                    $400,000
2009                          $34,000                    $434,000

Taxpayer did not learn of the requirement of filing FBARs for the foreign accounts, or of reporting income from the accounts on his U.S. income tax return, until the spring of 2014.    By the time taxpayer is able to obtain counsel on his legal obligations with respect to the foreign account he once had it is July, 2014.  He filed his income tax return for each year from 2005 through 2009 by its due date in the succeeding April.

According to the FBAR instructions, an FBAR must be filed for each calendar year for which the aggregate balance of foreign accounts over which the taxpayer had signature authority or a financial interest exceeded $10,000 at any time during the year.  The statute of limitations on assessment of the FBAR penalty of 31 USC §5321(a)(5) is six years, 31 USC § 5321(b)(1), and it begins to run on the filing date of the FBAR.  United States v. Williams, 489 Fed. Appx. 655, 657-58 (4th Cir. 2012).   In July, 2014, the 2008 FBAR is the earliest one with respect to which the statute of limitations on assessment is open.  The 2008 FBAR was due to be filed on June 30, 2009.  Six years from June 30 2009 is June 30, 2015.  The statute of limitations on assessment of an FBAR penalty for 2007 expired on June 30, 2014.  Thus, taxpayer owes FBARs for 2008 and 2009.

The statute of limitations on assessment of income tax is three years, and it begins to run on the date of filing of the income tax return.

All taxpayer needs to do to comply with the law is file his delinquent FBARs for 2008 and 2009.  He owes no income tax with respect to the foreign accounts, as the statute of limitations on assessment of income tax with respect to his income tax returns for the years  2005-2009.

Example 2. Taxpayer had beneficial ownership foreign accounts from 2005 until 2009.  Information on the accounts is as follows:

                         Aggregate Income      Highest Aggregate
Year                      on Accounts         Balance of Accounts
2005                          $21,000                    $320,000
2006                          $23,000                    $343,000
2007                          $26,000                    $369,000
2008                          $31,000                    $400,000
2009                          $34,000                    $434,000
2010                          $39,000                    $463,000
2011                          $44,000                    $507,000
2012                          $37,000                    $544,000

All taxpayer needs to do to comply with U.S. law concerning the foreign accounts is file his delinquent FBARs for 2008-2012.  The same result would obtain if taxpayer did not report income from the foreign accounts on his U.S. income tax return, and taxpayer had signature authority over the foreign accounts but not beneficial ownership of the foreign accounts.Taxpayer reported income from the accounts on his timely-filed U.S. income tax return for each year.  But taxpayer did not learn of the requirement of filing FBARs for the foreign accounts tax return, until the spring of 2014.    By the time taxpayer is able to obtain counsel on his legal obligations with respect to the foreign accounts he once had it is July, 2014.